With The Return Of Stock Market Volatility, Should You Invest In Private Equity?

The stock market is surprisingly volatile right now. After a pleasant 2017 when stocks rose consistency throughout the year many expected 2018 to be pretty much the same, thanks to tax cuts, increased company profitability and a generally healthy economy.

But that’s not the way it turned out. Instead, we had a year of ups and downs, with stocks potentially rounding out the year lower than they were at the start.

Investors, however, need to ask themselves whether any of this is surprising. Let’s face it: stocks right now are expensive. Current P/E ratios are getting close to where they were in the run-up to the dot-com boom. And to be good value (for investors who follow Warren Buffett and Benjamin Graham), they need to be priced lower than the discounted present value of their future profit stream returned to shareholders after tax. Given current prices, buying shares in public companies means that you believe that profits will continue to soar in the future. The current prices seem to indicate that the market thinks that they will.

But there’s a problem: household income just isn’t rising at the rate that the economy needs to sustain those higher profits across the board. Salaries are going up much more slowly, if at all, meaning that the demand from the middle-class is unlikely to materialize in the way that stock prices seem to be suggesting.

It’s this concern about incomes (and possibly a trade war with China) that led to the volatility that investors created in the public markets in February and October this year. Investors worried that companies were too expensive, that they wouldn’t generate the promised profits in the future, and that they should seek returns in other areas. Many risk-averse investors also wanted to invest in assets with more favorable risk profiles for themselves and their clients: pensioners, for instance, do not want their assets fluctuating 40 percent in value from one year to the next.

Private equity offers an alternative strategy for investors. Rather than invest in the volatile public markets, private equity allows investors to escape many of the big swings that one sees in public markets and invest in long-haul projects designed to pay off in five, ten, fifteen years – and possibly longer.

Private equity is a different animal to buying stocks and shares in publicly traded companies. For starters, it’s not something that many investors ever do: it’s just not as easy as buying a stock or a share (for which there are dozens of brokers and apps). Instead, an investor has to go and visit the company, see whether it offers the potential for return, and then become an owner by buying private shares.

The upside, however, is that there tend to be more extreme opportunities to make money in private equity. Relatively few investors (at least compared to the public markets) are seeking profits in the sector, meaning that there’s a higher likelihood of finding a hidden gem: a company that could generate ten times the initial investment in a short space of time. Companies do exist on the public exchanges which offer ten times return in a single year, but they are fabulously rare, and their gains tend to peter out relatively quickly. Private firms tend to be under less scrutiny by analysts than those on the public exchanges, and so profitable opportunities are not competed away as much.

Lack Of Information

One of the reasons many retail investors shy away from investing in private equities is the lack of information available on privately trading companies. Reporting requirements for these companies are minimal, and so it can be hard to find out much about them to decide to invest.

Although it may sound counterintuitive, this is a boon for investors. As discussed, fewer analysts have their eyes on privately traded companies and, therefore, there are more opportunities for savvy investors to make incredible returns.

Take the example of Peter Thiel, for instance. Back in 2004, Thiel invested $500,000 in the then private, Facebook in return for 10 percent of the company. Thiel invested some of his money from the sale of Paypal in the firm, believing that eventually, Facebook would hold an IPO. Thiel then sold 16 million of his shares at the Facebook IPO in 2012 which valued the company at more than $100 billion, generating $638 million.

But Thiel had connections and knew his way around the tech industry pretty well. What about the average retail investor without access to this kind of information?

It turns out that there are still options. Investors, for instance, can work with a private equity firm – an investment broker who deals specifically with the issue of private equity. These institutions open up a whole new world of possibilities to the average investor, without the need for them to go and do their own research into private companies (which often restrict access anyway).

High Initial Investments

Investing in a private company often comes with “high-minimums.” High minimums mean that you have to stump up a minimum amount of cash to even be allowed to invest in a firm. Firms do this because of the high transaction costs involved in transferring private equity, and because they want to make sure that the people investing in their firms have proven financial acumen.

Minimums can be extraordinarily high. Some companies demand minimums more than $10 million, well outside of the range of most small retail investors. However, high minimums don’t necessarily mean that it’s the end of the road. Again, retail investors can go to private equity firms, pool their money together, and have the private equity firm act on their behalf when investing in private companies. Then, when the time comes to sell, the private equity firm can take the money from the sale, and distribute the profits among those who initially invested.

In short, retail investors should consider the benefits of investing in private equity. It offers fabulous returns and shields portfolios from the vicissitudes of the public markets.

Think Investing Is Just For High Rollers? Think Again

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If you’re a human being with a pulse, you are no doubt frustrated about the lack of returns on savings accounts today. What the heck is going on?

The current savings situation is hardly ideal. But that doesn’t mean that there’s nothing you can do to grow your wealth. The good news is that investing isn’t just for high rollers anymore, it’s for the little guys too. Here’s how to get started in the investment world and finally earn a decent return on your money.

Start With Investments That Are Familiar

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The smartest investors specialize in the areas in which they are interested. If you’ve been a film critic all your life, don’t immediately jump into funding dozens of biotech startups. Look into opportunities in your own field and put money behind projects you think will work.

Don’t underestimate the power of your own expertise. Often you’ll be able to spot an opportunity that the big investors can’t see. You can buy up shares while they’re still cheap and then wait for interest in the firm to grow before selling them on.

Get Somebody Knowledgeable On Your Side

Investment advice, like investment planning services by PDS Planning, can help new investors. Advisors can design an investment strategy built around your goals. And they can give you valuable information, like the historical performance of a stock you’re interested in buying. Remember, data have shown that over the long term, equities outperform cash savings. So if you are looking for long-term investment advice, make sure you find someone who knows about the ins-and-outs of equities.

Diversify, Even If You Think You Can’t Afford It

Not everybody who starts an investment portfolio can afford to diversify immediately. But diversification is important, not least for reducing the amount of risk you’re exposed to. So what can beginner investors do? One option is to invest in mutual funds and exchange-traded funds. These are good options because they are financial products already linked to a basket of investments. These baskets often contain enormous asset values in the region of $500 million to $1 billion. As a result, risk is spread across dozens of financial assets.

It’s worth noting, however, that when you invest in a mutual fund, you’re effectively handing over your money to a manager. It’s the mutual fund manager who ultimately decides on how the fund will be allocated. You might be quite happy for somebody else to do this on your behalf. But, remember, it takes a lot of the control away from you.

If Everybody Else Is Going In One Direction, Go In The Other

Jim Rogers is a legendary, Singapore-based investor. He often gives his opinion about how investors should invest on podcasts and radio shows. His advice is to look at where everybody else is going and turn around and go in the opposite direction. He says that he has made his career out of looking for opportunities in places that nobody else sees. He’s famed for being bullish on places like Myanmar and the Far East.

Start-Up Loans: Top 5 Questions to Ask before Borrowing

Start-up loans for new businesses are more accessible today than they have been at any point since the start of the 2007/2008 financial crisis. Still, many new business owners can find themselves scratching their heads. They don’t know what to do, where to go, or even how to start the process of securing funding.

This lack of knowledge is the foundation for disaster if a new business owner does not get some direction. A good way to get that direction is to step back and ask some important questions. Asking them, and then finding out the answers, will quickly help the new business owner get his or her thoughts in order.

Here are the top questions to ask before applying for start-up loans:

1. How much money do I need?

This first question may seem self-evident, but it is surprising how many new business owners do not consider it as carefully as they should. Here’s the thing: start-up loans are intended to provide new businesses enough funding to get off the ground. The new business owner doesn’t know how much to borrow if he or she doesn’t know how much it will cost to get up and running.

2. What will I spend the money on?

Hand-in-hand with knowing how much money to borrow is knowing what the funds will be spent on. A brick-and-mortar start-up may need a tremendous amount of capital to cover investments in equipment and facilities. An online business might put most of the start-up funding into digital marketing.

The point is that business owners have to decide how they intend to invest their financial resources before they can make any realistic plans for borrowing. Not only that, lenders are most certainly going to want to know how start-up loan money will be spent.

3. How quickly do you need the money?

This question has made the list for one very simple reason: desperate people tend to make unwise decisions. If the idea for a new start-up is a good idea, it won’t hurt the new business owner to wait a few weeks to secure funding. Good ideas just don’t die that easily.

On the other hand, a new business owner desperate to get funding now before some wonderful opportunity slips away is probably looking at something that should be avoided. If an applicant cannot wait a little bit to get funding, he or she should probably just turn and walk away.

4. How quickly will I be able to repay the loans?

Start-up loans can be obtained as either short- or long-term instruments. The shorter the term, the higher the interest rate generally applied. The upside is that paying off the loan sooner will free the new business of that financial obligation.

The reality of short- and long-term funding dictates that the business owner realistically assess how long it will take to repay any and all loans. A business owner must also assess whether or not the business can survive long enough to make good on those loans.

5. What do my personal finances look like?

Banks and private lenders tend to be wary of new start-ups because such businesses do not have a track record to look at. As such, they have no choice but to look at the personal finances of loan applicants. New business owners need to take that into consideration. An applicant whose personal finances are messed up is going to have a difficult time obtaining start-up loans.

Securing funding for a start-up is not necessarily an easy process. It is not impossible either, but it does require quite a bit of thoughtful consideration and hard work. If you are thinking about applying for a start-up loan, step back and ask yourself these five questions first. How you answer them will dictate how you go about obtaining your funding.